Question

The balance sheet as of December 31, 2014, for Melrose Enterprises follows:


During 2014 Melrose entered into a loan agreement that required the company to maintain a debt/equity ratio of less than 2:1.
a. How much additional debt can Melrose take on before it violates the terms of the loan agreement?
b. Assume that during 2015 Melrose had revenues of $950,000 and expenses of $800,000. Assume that all revenues and expenses were in cash. How much additional debt can Melrose take on before it violates the terms of the loan agreement?
c. Assume again that during 2015 Melrose has cash revenues of $950,000 and cash expenses of $800,000. If Melrose pays a cash dividend of $100,000, how much additional debt can it take on before violating the terms of the loan agreement? If Melrose declares, but does not pay, the dividend during 2015, does it make a difference in the amount of additional debt the company can takeon?


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  • CreatedAugust 19, 2014
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